By Gareth Vaughan
ASB says its newly established covered bond programme, which at 7 billion euro (NZ$12.3 billion) is about twice the size of its Reserve Bank mandated limit, allows for future growth in the bank's asset base.
ASB has become the last of the country's big four banks to join the covered bonds bandwagon, registering a prospectus for the issue of up to 7 billion euros worth or covered bonds, or the equivalent in other currencies. It has applied to list the bonds on the London Stock Exchange. The prospectus notes the covered bonds are expected to be assigned an Aaa credit rating from Moody's Investors Service and an AAA rating by Fitch Ratings.
Barclays Capital and ASB are listed as arrangers for the programme and Barclays as dealers.
Nigel Annett, ASB's Treasury general manager, told interest.co.nz the bank hasn't yet issued any covered bonds and the timing of the first issue will depend on the market and future funding requirements.
"Feedback from offshore investors indicates that there is interest in an ASB Covered Bond," Annett said.
The Reserve Bank says banks can use up to 10% of their total assets as collateral for covered bonds. That means, based on its total assets of NZ$63.1 billion, ASB's NZ$12.3 billion covered bond programme is almost twice the size of its about NZ$6.31 billion 10% limit. Annett said the seven billion euro programme allows for future growth in ASB's asset base.
ASB's not the only bank to have a covered bond programme in excess of the Reserve Bank imposed limit. Westpac has a 5 billion euros (NZ$8.8 billion) programme and total assets of NZ$56.8 billion. That puts its 10% cap at about NZ$5.68 billion. However, the banks say they intend to issue their full programme of covered bonds over a period of several years.
Covered bonds are senior debt instruments backed by a dedicated group of home loans assigned to provide security for the debt known as a “cover pool.” Popular in Europe, they are usually issued for terms of five to 10 years. The way they're structured means if the issuing bank defaults, the assets in the cover pool are carved off - or ring fenced - from the bank issuer’s other assets solely for the benefit of the covered bondholders.
This ring fencing of a chunk of a bank’s balance sheet is why covered bonds have been banned by the Australian Prudential Regulation Authority as, in the event of a default by the bank issuer, depositors’ claims are diluted. However, the Australian government decided last December to change the law, and has introduced legislation to allow Australian banks to issue covered bonds.
Unlike with residential mortgage backed securities (RMBS), covered bond cashflows are funded by the issuer and not by the cashflows of the mortgage pool. Covered bond investors have dual recourse to the bank and mortgage pool collateral while senior bank bond investors can only claim on the bank, and RMBS investors can only claim on the collateral. Covered bonds typically carry AAA credit ratings.
In June ANZ New Zealand completed an investor roadshow for a 5 billion euros covered bond programme but hasn't yet issued any covered bonds. However, Westpac New Zealand raised 1 billion euros from overseas institutional investors in its first covered bond issue in June and in four covered bond issues so far BNZ has raised about NZ$3.47 billion, reaching 60% of its Reserve Bank mandated capacity.
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